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Notice I-16-31

December 19, 2016

Effective Date of Interpretive Notice to NFA Compliance Rule 2-46: Reporting Financial Information on NFA Forms PQR and PR

The Commodity Futures Trading Commission (CFTC) recently approved NFA's amendment to NFA Compliance Rule 2-46 and a related Interpretive Notice entitled NFA Compliance Rule 2-46: Reporting Financial Information on NFA Forms PQR and PR. The amendment and Interpretive Notice require commodity pool operators (CPO) and commodity trading advisors (CTA) to report two financial ratios regarding a CPO's or CTA's financial condition on the quarterly Forms PQR and PR. The amendment and the Interpretive Notice will be effective for Forms PQR and PR as of the quarter ending June 30, 2017.

These new reporting requirements evolved from NFA's review of possible changes to the regulatory structure applicable to CPO and CTA Members. The goal of this review was to identify regulatory solutions to address a number of emergency disciplinary actions NFA had taken against CPO and CTA Members in recent years that caused serious harm to customers due to firms with insufficient assets to operate as going concerns.

Over the last two years, NFA has explored different regulatory requirements to address an important regulatory objective—identifying CPOs and CTAs early on that might be facing financial difficulties and may be impaired in their ability to act in the best interests of their clients. Unlike FCMs and IBs, which are required to regularly report financial information to NFA for regulatory oversight purposes, CPOs and CTAs do not currently provide any information to NFA on the financial condition of the firm. The new reporting requirements accomplish this regulatory objective by providing NFA with relevant information on the financial condition of CPOs and CTAs.

Neither Rule 2-46 nor the Interpretive Notice mandate minimum ratio percentages that a CPO or CTA Member must meet, and the fact that a firm's financial ratios indicate it may be facing financial difficulties is not a rule violation. NFA will use the financial ratio information as part of its regulatory oversight program for CPOs and CTAs.

Required Ratios

As described in the Interpretive Notice, NFA Forms PQR and PR will contain data fields requiring CPO and CTA Members to report the following two ratios:

  • Current Assets/Current Liabilities (CA/CL) Ratio—This ratio divides a firm's current assets by its current liabilities, providing a measure of a firm's liquidity. This ratio is based on a firm's current asset and current liability balances at the reporting quarter end.
  • Total Revenue/Total Expenses (TR/TE) Ratio—This ratio divides a firm's total revenue by its total expenses, measuring a firm's operating margin. Although a firm will report this ratio each quarter, the ratio must reflect the total revenue earned and total expenses incurred during the prior 12 months.

The ratios must be computed using the accrual method of accounting and in accordance with generally accepted accounting principles or another internationally recognized accounting standard, consistently applied. The Interpretive Notice includes definitions of current assets, current liabilities, total revenue and total expenses, and provides guidance on how to calculate the required ratios using the accrual method of accounting.

CPO and CTA Members that are part of a holding company/subsidiary structure may elect to report the ratios at the parent level. Forms PQR and PR will contain data fields requiring each CPO and CTA to indicate whether it is part of a holding company/subsidiary structure and, if so, to indicate whether the firm is reporting on the parent/holding company level or the subsidiary Member firm level.

Recordkeeping

CPO and CTA Members must be able to demonstrate to NFA how they calculated the ratios reported on Form PQR or PR and maintain financial records supporting the calculation of these ratios in accordance with NFA Compliance Rule 2-10. Each CPO and CTA Member must make these financial records available to NFA during an examination or upon request. For CPO and CTA Members that are part of a holding company structure, this may include making available the relevant financial records of the holding company.

Educational Outreach

To help CPO and CTA Members understand the new reporting requirements and the calculation of the ratios:

  • NFA will produce a webinar early next year;
  • Forms PQR and PR will include help text providing additional guidance regarding how to complete the new data fields; and
  • NFA staff will work with Members during examinations to ensure that the firm is calculating the ratios correctly.

Finally, staff will be available to address questions and Members should contact Tracey Hunt, Associate Director, Compliance (thunt@nfa.futures.org or 312-781-1284) or Mary McHenry, Associate Director, Compliance (mmchenry@nfa.futures.org or 312-781-1420).

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